Lenders calculate income for self-employed borrowers by averaging earnings over a set period, typically two years, to account for fluctuations. They review tax returns, including Schedule C (for sole proprietors) or K-1s (for business owners), and deduct business expenses to determine net income. If income has been increasing, lenders may use the most recent year’s figures, but if earnings have declined, they may take a more conservative approach by using the lower number.
For borrowers whose income varies significantly, alternative loan options such as bank statement loans can provide flexibility. Instead of tax returns, lenders analyze 12 to 24 months of bank deposits to determine an average monthly income. Maintaining strong financial records, reducing excessive write-offs, and keeping a steady cash flow can help self-employed borrowers present a more favorable financial profile when applying for a mortgage.
